Risk Preferences Are Not Time Preferences: Discounted Expected Utility with a Disproportionate Preference for Certainty

James Andreoni, Charles Sprenger

NBER Working Paper No. 16348
Issued in September 2010
NBER Program(s):   PE

Risk and time are intertwined. The present is known while the future is inherently risky. Discounted expected utility provides a simple, coherent structure for analyzing decisions in intertemporal, uncertain environments. However, we document robust violations of discounted expected utility, inconsistent with both prospect theory probability weighting and models with preferences for the resolution of uncertainty. We find that we can organize our data with surprising precision if we allow for a disproportionate preference for certainty. These results have potentially important implications for understanding dynamically inconsistent preferences.

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Acknowledgments

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